Universal Credit could lift over 500,000 children out of poverty

July 4, 2015

New research published today (Saturday) by the TUC and Child Poverty Action Group finds that much bigger reductions to child poverty could be achieved by channelling support through Universal Credit instead of raising the income tax threshold.

The report, Reforms to Universal Credit, looks at alternative options for helping low income families of almost identical expenditure to the current cost of immediately raising the income tax threshold to £12,500.

In a ranking of 13 options, the tax threshold proposal cost by far the most, yet came bottom of the list for its child poverty reducing potential.

The other 12 options investigated would improve Universal Credit to varying degrees in one of three ways: (1) reducing the taper rate, (2) increasing work allowances, and (3) increasing the child element.

The taper rate is the rate at which Universal Credit is reduced when a person’s earnings increase. Critics have said it works like a very high tax rate. It is currently set at 65 per cent – so if a claimant’s pay goes up by £100 they have a net gain of £35, because their Universal Credit payment is reduced by £65. The lower the taper rate, the stronger work incentives are.

Work allowances ensure that some earnings each month are not affected by the taper. The amount of the work allowance varies according to family composition and circumstances. The higher the work allowance, the stronger work incentives are. There is no additional work allowance for second earners – so for them work incentives are currently very poor.

The child element is currently set at £277.08 per month for the first child and £231.67 for second and subsequent children. The research found that increasing the child element would have the strongest impact for reducing child poverty.

The TUC and Child Poverty Action Group argue that a package of measures combining all three options would be the most effective approach. For example, a £13.6bn package of improvements that (1) cut the taper from 65 per cent to 55 percent, (2) increased work allowances by £80 a month, and (3) increased both the child element and the disabled child element by £40 a month each, would achieve a direct reduction in child poverty of 460,000 children. The resulting improvement to work incentives would be likely to result in further child poverty reductions, bringing the total reduction to well over half a million.

TUC General Secretary Frances O’Grady said: “The government is right to think about giving more help to people in work on low earnings, but the Chancellor should look carefully at the most effective way of doing it before making a final decision on raising the tax threshold.

“The taper in Universal Credit acts like a tax rate of 65 per cent on low-paid workers, so it makes good sense to prioritise reducing it. We’d also like to see other improvements, like a higher work allowance and higher child element.

“All along we’ve been told that the great thing about Universal Credit is how easy it is to make policy changes that boost work incentives and reduce poverty. With more and more people moving across to Universal Credit, it would be strange for the government to ignore its full potential for making work pay and reducing poverty.”

Chief Executive of the Child Poverty Action Group Alison Garnham said: “This comprehensive analysis shows the Chancellor must be careful not to back the wrong horse when it comes to the government’s flagship policies. Rather than committing billions on the costly and poorly targeted policy of raising the personal tax allowance, the Treasury should stop starving Universal Credit of the investment it needs to fulfil its poverty-reducing potential and justify the massive upheaval surrounding it.

“The evidence is clear that investment in tax credits is incredibly effective in lifting children out of poverty – a point that the Chancellor recognised in the 2010 spending review. Now we can see that the same kind of support, through the child element in Universal Credit, would have the same kind of poverty-reducing result.

“Ahead of next week’s Budget, this report provides clear evidence that tax giveaways that end up benefitting richer groups should be avoided in favour of policies which actually help the low-paid and which lift children out of hardship.”

- Although the government has announced that it will abandon targets to reduce child poverty, it will still measure and publish child poverty rates annually as in previous years.

- Universal Credit is currently being phased in by the Department for Work and Pensions as a single system to replace six means-tested benefits: Jobseeker’s Allowance, Housing Benefit, Working Tax Credit, Child Tax Credit, Employment and Support Allowance and Income Support.

- The total cost of increases made to the personal tax allowance since 2010 to bring it to its current level of £10,600 is around £10.7m.

- The Institute for Fiscal Studies costed the policy of immediately increasing the personal tax allowance further to £12,500 at £12.5bn in their 2014 Green Budget (www.ifs.org.uk/publications/7072). But the date of implementation makes a big difference to the cost of the policy. If it was not implemented until 2020, the cost would be significantly lower. However, the alternative proposals for Universal Credit in this report could also be brought in gradually to reduce their cost.

- In his 2010 spending review, the Chancellor George Osborne increased child tax credit and said: “We want to ensure that low income families with children are protected from the adverse effects from these essential savings. Because this Government is committed to ending child poverty”. The full text can be found at www.bbc.co.uk/news/uk-politics-11585941